Whether you’re living in the United States or abroad, you will usually be required to pay US taxes on the income earned in your offshore bank account. America taxes its citizens on our worldwide income, no matter where it’s earned. But, there are a few workarounds to create a tax free bank account. This article will describe how to setup an tax free offshore bank account.
There are three ways to create a tax free offshore bank account.
- Take your IRA offshore,
- Setup an offshore trust that holds a US compliant offshore life insurance policy, or
- Build an offshore business that earns foreign sourced active income.
The first two options are focused on those that want to open a tax free or tax deferred bank account for passive income and capital gains. The third is for American entrepreneurs that will move an active business outside of the United States.
Offshore IRA LLC
The easiest way for most Americans to open a tax free offshore bank account is to move their retirement account offshore. This gets you a tax free account (ROTH) or tax deferred (traditional) and adds a layer of protection to your retirement account.
An offshore IRA LLC also allows you to move your most important asset outside of the United States and out of the dollar. You can maintain the account’s tax preferred status while investing in foreign real estate, stocks bonds, currencies, or just about anything you like.
Of course, you can hold US dollars and buy US stocks in your offshore bank account if you like. The point is that you’re not limited to US investments. You can select higher returning foreign investments or leave the money on red with US investments.
And taking your IRA offshore adds a layer of protection not available in the United States. Remember that, in America, IRA’s are not afforded the same Federal protections of 401(K) accounts and other ERISA plans. IRA’s are covered by state law, not federal law (unless you declare bankruptcy).
Likewise, the IRS can seize your IRA, or any other retirement account for that matter, any time they choose. Federal and state creditor protections do not apply to Federal tax debts.
By moving your retirement account offshore, you take it off the table for civil creditors and the IRS. So long as you choose the right bank, no one will have the ability to seize or levy your offshore IRA LLC account.
Note that the US IRS can levy any bank with a branch in the United States. So, the key to protecting your cash from the IRS is to hold it in a small offshore bank with no ties to Uncle Sam.
International Life Insurance Inside an Offshore Trust
Moving your IRA offshore is great if you have a retirement account from a previous employer that’s eligible to be invested abroad. It’s also great for those with large defined benefit plans that can be converted into IRAs.
If you have neither of these, or you want to move a lot more offshore that what you can get into a US retirement account (because of the contribution limits), consider a US compliant offshore life insurance policy held inside an offshore trust.
An international private placement life insurance policy is the ultimate tax free offshore bank account. A PPLI has no contribution limits or distribution requirements, and is meant for those who want a tax free account with $2 million or more.
A single pay private placement policy basically creates an unlimited offshore IRA LLC and unlimited tax free offshore bank account. All gains inside the policy are tax deferred until you take them out. If you leave the cash in the offshore account, it will grow tax deferred over your life and then pass to your heirs tax free.
Tax free can mean no estate tax and no income taxes. When your beneficiaries receive their distribution, they get a step up in basis, no income tax is due on the appreciation earned inside the policy during your lifetime.
If you want to achieve this level of tax deferral for multiple generations, you can place the policy inside an offshore dynasty trust. In that case, your heirs will only pay tax on distributions and never on the principal of the trust.
If your insurance policy is inside a specific type of offshore trust, you’ll also avoid estate taxes. Because President Trump has vowed to eliminate estate taxes, I won’t go into detail here… let’s see how this plays out in the coming months.
No matter what happens to the estate tax, tax free or tax deferred growth in an offshore bank account will remain the primary benefit of international life insurance.
Active Business Operated Offshore
The other way to create a tax free offshore bank account is to move an active business abroad. If the business is operated from outside of the United States, which means it has no US employees, offices, or sourced income, you can take out $102,100 tax free using the Foreign Earned Income Exclusion.
You then leave business profits in excess of the FEIE in your offshore corporation tax deferred. Like an insurance policy, this can create a giant tax deferred IRA like account offshore that’s only taxable when brought back into the United States.
Note that I’m talking about an active business operated from abroad. This does not mean forming an offshore corporation and working from the US. Your international business must have employees (even if that’s just you) and real substance abroad.
And this must be an active business. These tax benefits do not apply to passive income, most rental real estate investors, capital gains, dividends, royalties, etc. If you have an international business with retained earnings, you can create a tax free or tax deferred offshore bank account.
I hope this article on 3 ways to create a tax free offshore bank account has been helpful. For more information on IRA LLCs, international life insurance, or active businesses, please contact me at firstname.lastname@example.org or call us at (6190 550-2743. All consultations are free and confidential.